What
is common between huge global corporations like Microsoft, Google, Jet Blue, eBay
and The Home Depot? It is the same thing, which has spurred the boom in IT, Software,
Biotech, Semiconductor and many other hightech industries in the USA. The common
factor we are talking about here is Venture Capital (VC) that has provided a strong
support in the establishment of these companies.
Traditional
providers of finance such as banks, financial institutions etc., evaluate investment
options based on tangible assets, regularity and certainty of cash flow as well
as the past history of a business. This is clearly not appropriate for evaluation
of the companies, in which tangible assets are a small proportion of investments,
business idea is untested, cash flows cannot be predicted with certainty and the
most important resources are human beings and knowledge. In fact, all these are
features of the sunrise sectors such as IT, ITes, Biotech etc. Venture capital
financing, a specialized form of financing has come to fill the void, existing
the evaluation of such businesses.
Simply
put, venture capital firms are those, which invest in untested & innovative
ideas, generally for a prespecified period of time, in expecting a
much higher rate of return (usually, an Internal Rate of Return (IRR) in
the range of 2540%). Investments are generally in the form of equity, though,
they may also be in other forms such as preference shares or debentures or even
in the form of special financial instruments engineered for a particular situation.
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